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Captives Heating Up, with Utah and Delaware Growing at Fast Pace

Source: A.M. Best

Posted on 28 Feb 2011

Utah and Delaware are taking the lead when it comes to growing faster than many other states when it comes to U.S. captive domiciles.

Vermont, the long-time leader of U.S. captive domiciles, added 33 new captives and continued to hold on to its top position with 572 captives at year-end 2010. Utah edged its way up to second place, with 188 captives. Utah also saw the strongest growth, with 54 new captives forming in the "Beehive" state.

"We had a big year," said Ross C. Elliott, captive insurance director for Utah. "There was a lot of pent up demand."

Elliott said about 42 of those 54 new captives were formed in the last two months of the year.

He said one factor in Utah's growth has been other domiciles struggling to deal with staffing issues.

"As companies looked around at domiciles, many have been hit with budget cuts and couldn't take any more applications," Elliott said. Also, he said Utah's position of being one of just two jurisdictions -- the other is Arizona -- to charge a flat fee premium tax might have given the state a boost.

Nancy Gray, regional managing director of Aon Global Insurance Managers, said Arizona has a good captive law on the books, but has faced budget cuts and has been unable to staff the office appropriately.

"They've suffered as a result," Gray said. "I still believe it's a good solid captive domicile, but it's a longer process."Stephanie Lefkowski, chief analyst with Arizona's captive division, disagreed that staffing has been an issue with the licensing of captives.

While the insurance department experienced from cuts in 2009, the captive division did not lose staff, she said, although it was impacted by a statewide hiring freeze.

Delaware, which has long been a financial services hot spot, showed the second-greatest number in new captives in 2010. Delaware licensed 48 new captives, bringing its total to 96.

Steve Kinion, Delaware captive bureau manager, said the state has an advantage over competing domiciles by being the only one that allows series entity captives.

"It's our flagship or marquee product," Kinion said.

Only eight states allow series limited liability companies, which are set up to allow one core company to segregate its risks into subsidiaries, which are recognized as their own individual tax-paying entities.

Delaware is one such state, but has taken the regulation a step further to allow series captives. Similar to a rent-a-captive, series captives are owned by a parent company with individual captives or cells. But unlike a segregated cell captive, where the individual cells are treated as accounts, a series captive allows those individual members of the series to be treated like a captive -- except they are not subject to the minimum premium tax requirement or a standard minimum capitalization.

All the series captives' premiums are pooled together, and the premium tax is based on that collective figure, rather than each member of the series having to face its own $5,000 minimum premium tax, Kinion said. Also, regulators review what types of risk a series captive is undertaking and base the required capital on that review, rather than the $250,000 standard capitalization required for some other types of captives in the state.

Of the 48 new captives licensed in Delaware in 2010, 22 were series captives. That reflects the core, or parent, series captives, not the number of individual series belonging to each one.

Also, unlike many jurisdictions, Delaware does not require captives to hold an annual meeting in the state as long as one director is a state resident.

And while Delaware is a small state, it's easy to get to, and not far from the major financial centers of New York, Philadelphia, Boston and Washington, D.C., Kinion said. "It's location, location, location," he said. "I believe the numbers show it: Delaware is a very responsible captive domicile," Kinion said.

Utah had four captives redomesticate from offshore jurisdictions, while Delaware had a number of foreign captives set up "branch captives."

"There seems to be a reverse migration going on now, from offshore back to onshore," Kinion said.

Vermont also saw 21 captives dissolved in 2010, more than the other jurisdictions surveyed. That's not a surprise, given the sheer volume of captives in Vermont, Gray said. "It's not unusual to have captives dissolved. The higher the volume of captives, the more captives that have been around a long time, the more likely they are to have run through the cycle and decide to close the captive," Gray said.

Vermont's legislation and regulation is still considered the gold standard in the captive industry.

"A lot of the domiciles have viewed Vermont's law as the template, the starting point, in starting their new captive structure," Gray said. "They are modeled after Vermont for the most part."

Gray said one challenge the industry faces is the number of different types of captive structures, and the number of captive domiciles available today.

"With 30 captive domiciles competing for business, it's interesting to see what happens as the options for captive owners has expanded," Gray said. "I think the competition is good, it creates an environment of more choice for captive owners, and that is a good thing."

New Jersey is poised to become the latest addition to the roster of U.S. captive domiciles. The new law is slated to go into effect next week, 45 days after the state Legislature passed the measure, with or without the governor's signature.